10 Questions to Ask Before You Buy a Stock

NEW YORK (TheStreet) -- It may seem like a given that you should do your homework before plunking down your hard-earned cash on a company's stock -- but many people don't.

"There are some investors who simply don't carefully weigh their stock-investment decisions," said Brad Barber, University of California Davis professor and co-author of the study All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors. "Individuals are heavy buyers of stocks that are in the news -- that is true of good and bad news," he said.

As stock market crashes have taught us, a carefree investing style doesn't work forever. In fact, its success usually comes to an abrupt end. It would behoove investors to relearn that painful lesson before the next crash.

With that in mind, here are 10 questions investors should ask -- and answer -- before buying a stock. 

Of course, knowing all the answers doesn't guarantee a winning stock. Nothing can do that. But over the long haul, taking the time to consider these questions will make one a better, more well-informed investor.

1. What Does the Company Do?

Warren Buffett famously says he doesn't invest in what he doesn't understand. If the greatest investor of the past 60 years is brave enough to acknowledge that he doesn't understand all companies, we should all probably take heed. This first basic question is a simple one, but that doesn't mean it's easy. To answer the question, there are plenty of places to look, including the company's Web site.

2. Is the Company Profitable? 

This is also a simple question, which can be made more complicated by all sorts of variations on a company's earnings. Investors can read the quarterly and annual earnings reports to check out how much net income the company reported, in dollars and in per-share earnings. Later down in this column we'll address ways to mine for red flags in earnings.

If you liked this article you might like

How to Make Your Life Successful Just Like Billionaire Warren Buffett

Crazy Weak U.S. Dollar Will Make These 10 Companies Huge Winners

How to Eat Lunch With Billionaire Warren Buffett

How to Invest Like Billionaire Warren Buffett

How to Make a Deal Like Billionaire Investor Warren Buffett